“Before everything else, preparation is the key to success”
– Alexander Graham Bell
Preparation begins with one’s mindset. The new Super Bowl Champion Philadelphia Eagles’ coaches and players had to have the proper mindset back in training camp to begin preparations for championship-level success. Despite being the underdog to the mighty dynastic New England Patriots, before setting foot on the field of play, the Eagles had to believe they could win despite the challenges they would face (e.g. loss of starting QB) and not be intimidated by the track record of success of their eventual opponent before setting foot on the field of play. (Read quotes alluding to the Eagle’s mindset prior to playing in the Super Bowl.)
When there are hundreds of thousands or even millions of dollars at stake in a long-term, generally fixed contract that houses the operations of your multi-million or multi-billion-dollar enterprise, preparing for relocation or renewing a lease is like preparing for your own Super Bowl. Your company can win the game by negotiating a below-market deal with concessions and terms that align with your business’s overall strategy, budget and goals. To achieve a victory, you must have the right team in place and that team—including you, the decision-maker—needs to be prepared. As one of the top three expenses for virtually any enterprise, real estate leases matter. And if you are a multi-site user, as is the case in the NFL regular season, every game throughout the “season” that is your portfolio of leases can have a significant impact on your outcome.
So let’s focus on mindset. Embracing the appropriate mindset (and discarding all-too-common assumptions that tend to undermine tenants in real estate negotiations) is the essential groundwork for securing your organization the best possible lease terms. Here are four mindsets worth considering:
1. You (the Tenant) have the Power!
Too often I hear powerlessness in speech when I listen to new clients talk about their particular real estate situation. They view themselves as weak and the landlords as mighty. Wake up! Your tenancy is valuable…literally! Here is a shortlist of some reasons why your tenancy is valuable and why at the end of the day landlords want to make a deal with you, especially when it comes to renewals:
A. Building Value
If you relocate, the vacancy percentage rises, which could affect the landlord’s ability to refinance or even sell. The inverse is also true: signing a new tenant could decrease a building’s vacancy level such that a sale or refinance is achievable. In this sense, it’s possible for a lease to be much more valuable to a given landlord than merely the amount of contract rent associated with that lease.
C. Tenant Mix
You’re a great credit tenant and/or you diversify the tenant roster, keeping their asset stable and attractive to buyers and lenders.
You are in the driver’s seat! Don’t let landlords off the hook by letting conventional landlord-centric thoughts into your head.
2. You are not a captive tenant.
Rarely is there only one good alternative, and (dare I say) never is there none. Even in the tightest of markets and/or with highly specialized end-users, the right team will come up with creative strategies and tactics to execute at the right time and achieve the desired results. Creativity and out-of-the-box thinking is often a necessary component to winning the game, just like calling the right trick play at the right time can get a team a critical first down or score. David still does beat Goliath. (Remember the 2007 Fiesta Bowl?) You have options…be innovative!
3. Conflict of Interest does matter.
There are many reasons why truly unconflicted representation (meaning the individual agents serving your organization and the CRE firm to which those agents belong are each unconflicted) is critical to tenants getting the best results possible. (For more detailed discussion of the importance of unconflicted representation, you can read other blogs on this, and many other websites.) The bottom line is that your team (broker, project manager, architect, etc.) should have your interests and your interests alone as their priority, on both the conscious and subconscious levels. As you may well know, the subconscious controls the conscious; if your broker is subconsciously conflicted between landlord work and tenant work as the source of income, eventually with large amounts of money at stake, the subconscious will dictate his/her choices. That service provider will take conscious actions that will favor not you, the tenant, but rather the landlords to which that broker has developed an economically rational allegiance. CRE firms cannot effectively serve two masters. As traditional, conflicted CRE firms receive the lion’s share of their revenue from landlords, guess whose interests end up truly being served when tenants receive conflicted representation? I will give you a hint: it’s not the tenants.
4. Size does and doesn’t matter.
“If you change the way you look at things, the things you look at change.”
If your company is a smaller user in a building, it could be easy to fall into the trap of not expecting much in the form of concessions because you are not perceived as big enough to warrant significant concessions. You may have even been told this by your broker in the past. My experience tells me that this is an assumption that must always be tested, and it is not unusual for my team at Keyser to achieve just as good, if not better results for a smaller tenant as we can for a larger one. Here are a few reasons why:
A. Size is relative.
A 10,000 SF tenant in a 300,000 SF office tower is small relative to the size of the building and larger tenants in it. However, that same 10,000 SF tenant is not as “small” in a 50,000 SF suburban office building. An adept tenant broker can use this concept to leverage a better deal by making landlords compete for your tenancy.
B. Under Mindset #1 above, see the first point as to why your tenancy is valuable.
C. A tenant’s business could serve a particular role or niche in the building or project either as a resource for other tenants (for example a printer), as a source of diversity in the tenant mix for an industry balanced roster in the building, or you may have excellent credit which makes the building more attractive to potential buyers.
D. In some instances, a desired “small” tenant can realize additional concessions
A higher tenant improvement allowance or more abated rent—because the total cost of those concessions may be less painful to a landlord than that same per square foot concession for a larger user, simply because of the small tenant’s smaller footprint.
In summary, the tenant thinking like they are in the driver’s seat during the lease relocation or renewal process is critical and is a mindset that should be shared with the tenant’s advisory team of creative, unconflicted brokers and service providers no matter the size of their square footage footprint.